There is a rather odd article up on Reuters with the headline, “Short selling declines as U.S. stocks scrape new lows” It is mainly concerned with the issue of whether shorts are culprits in the recent price declines of automaker and certain financial shares. The declining short interest says the attempts to implicate them are most decidedly misguided. That part it does well, But some of its omissions are striking.
We’ve commented before that financial short interest is down, in the context of Citi. So that part is not news. And shorts on the automakers being down is no surprise.
But even though as the article indicates, financial shares are well off their July levels, they have also rebounded further off the recent bottom than most other shares. If you use, say, XLF as a proxy, financials have bounced 35% versus 18% for the market as a whole.
A big issue not mentioned in the Reuters piece is that, aside from the fact that the stocks are well down from their peak, is that both financials and auto companies are subject to government intention (the capital injections, the , making a short call much tricker than at other times.
And the article also neglects to mention that short interest is actually a bullish sign, since any short sale will eventually have to be covered with a purchase of the shares.
From Reuters:
…..since July 10, short interest on financial companies has fallen nearly 40 percent to an average of 3.68 percent on November 14, according to Short Alert Research data released this week.
Among brokerages, the decline in short interest – the ratio of stocks sold short to overall shares – was an even greater 43.5 percent.
Short interest in automakers has declined 32 percent in the past five months to roughly 11.5 percent,
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Anyone watching or riding the rally in C and F this week would know that they were seeing a short covering rally.
I had a nice time riding the rally and made 100% in F but I think that’s all she wrote.. this is no market to get greedy with.
“And the article also neglects to mention that short interest is actually a bullish sign, since any short sale will eventually have to be covered with a purchase of the shares.”
And any purchase of stocks is a bearish signal since they will have have to be sold in the future… :-/
It’s a dangerous market.
‘government intention’ –a nice way of saying the government actively manipulates markets in what heretofor was criminal.
Lawlessness reigns supreme. We’ll pay for this. strike that
we are all paying for this.
“And any purchase of stocks is a bearish signal since they will have have to be sold in the future… :-/”
no, no, no. Us shorties have different time frames than most longs. I am short financials for the sixth time in a year right now. I would not dream of holding a short ETF for 30 years. In the long run all sectors rise in value.
For most investors, most assets are in long term long positions.
Short interest is a proxy for the time frame of the parties involved. And exceptionally high short interest is bullish. Ask any recent VW shorter…
We would like to sell GM but can’t because we can’t borrow the shares. Just sayin’…
Ask any recent VW shorter…
I hope nobody here got caught on the wrong end of that howitzer. Probably a lot of lachen und tranen in Frankfurt that day. Here’s a hilarious article. It looks like Porsche’s heavily exposed on the way down, so this particular comedy’s not over yet.
Porsche said this week that its Volkswagen options bets produced a gain of 6.83 billion euros ($8.8 billion) in fiscal 2008. The company made 1 billion euros from selling vehicles.
Let me suggest a rather simple explantion of why short interest is falling in some of these stocks: diminishing returns. Where is the potential for holding short a stock which has fallen to under 5 dollars? On shorts, profits approach a definable limit. And the closer you get to that limit, the more unstable the price action gets. You can wait to get closer to the limit (zero); or–as you wait–you can see the price spike up a distance several times greater than the maximum potential downside profit. I think that happened with Citi, GM and Ford in the last week.